Time to Cut Energy Exposure, Says Morgan Stanley

By Avi Salzman

Morgan Stanley analysts started the year urging investors to load up on oil-heavy names, but on Monday they pulled back, lowering their rating on the energy sector to Market Weight.

“[I]t is now our view that the bull-bear case on oil is skewed to the downside over the next three to six months,” wrote Morgan Stanley’s Adam Parker. Earnings expectations for energy stocks have grown considerably, and “incremental margin expectations [or profit margins on revenue above today’s level] are now high relative to other sectors in the market.”

The energy sector is now trading at 2.4 times book value, up from 1.5 times last fall. When risk aversion grows, investors should generally reduce their exposure to oil as an asset class, Parker contends.

Of the major oil companies, investors have priced the supply shocks into shares of Chevron (CVX) and ConocoPhilips (COP) more so than Exxon Mobil (XOM) and Schlumberger (SLB), Parker notes.

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